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# Valuing bond and preferred stock

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1. Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a \$1,000 face value and coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. If the yield on similar-risk investments is 14 percent, what is the current market value (price) of the bond?

2. Suppose that five years ago Cisco Systems sold a 15-year bond issue that had a \$1,000 par value and a 7 percent coupon rate. Interest is paid semiannually.

A. If the going interest rate has risen to 10 percent, at what price would the bonds be selling today?

B. Suppose that the interest rate remained at 10 percent for the next 10 years. What would happen to the price of the Cisco Systems bonds over time?

3. Nancy Cotton bought NuTalk for \$15 per share. One year later, Nancy sold the stock for 421 per share, just after she received a \$0.90 cash dividend from the company. What total return did Nancy earn? What were the dividend yield and the capital gains yield?

4. Ralph Rafferty purchased Gold Depot at the beginning of January for \$25 per share. Ralph received a \$1.25 dividend payment from the company at the end of December. At that time, the stock was selling for \$27.50 per share. What is Ralph's return on his investment for the year? What portion of the total return is the dividend yield and what portion is the capital gains yield?

5. Many years ago, Minnow Bait and Tackle issued preferred stock. The stock pays an annual dividend equal to \$6.80. If the required rate of return on similar-risk investments is 8 percent, What should be the market value of Minnow's preferred stock?

#### Solution Preview

Please refer below for solution of 2(b)

1. Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a \$1,000 face value and coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. If the yield on similar-risk investments is 14 percent, what is the current market value (price) of the bond?

Number of coupon payments left=n=6*2=12
Face value=M=\$1000
Required rate of return=r=14%/2=7% (semi annual)
Coupon payment=C=1000*10%/2=\$50 (semi annual)
Price of bond= C/r*(1-1/(1+r)^n)+M/(1+r)^n
=50/7%*(1-1/(1+7%)^12)+1000/(1+7%)^12
=\$841.15

2. Suppose that five years ago Cisco Systems sold a 15-year bond issue that had a ...

#### Solution Summary

There are five problems. Solutions describe the methodology for finding value of coupon paying bond, dividend yield and capital gain for common stock. It also describes the steps for calculating price of preferred stock.

\$2.19